In US District Court for the District of Massachusetts, Suzuki v. Abiomed, Inc. (1:2016cv12214), the judge denied a motion for dismissal of a case regarding the treatment of unvested performance-based stock grants to an employee upon termination of employment. The employee terminated before the end of the performance period, so the shares were forfeited because they were not vested. We all know that’s how these plans work.

But, in the judge’s view, the shares were maybe not not vested. From near to far from here to there, funny things are everywhere. (Yes, we tend to use the term “unvested” but not not vested sounds more Dr. Seuss-y. I’m currently working with my other daughter to recite One Fish Two Fish Red Fish Blue Fish from beginning to end. So maybe my daily readings of that are influencing my writing style.)

Since the advent of performance conditions on equity grants – going back to the late 1990s but not prevalent until the late 2000’s – there has been a continuing stream of litigation around poorly-designed and poorly-implemented performance equity grants. Despite the availability of detailed guidance by experts in designing these plans (disclosure – I am a contributing author to that one) companies continue to get it wrong. I have served as an expert witness and consultant on many cases centered on these plans. So before even reading the details of this case, I thought I could guess at the series of events:

Consultant tells client to attach performance conditions to equity grants because that is “good governance” and is what ISS wants to see. Even if ISS’s point of view could not be less relevant for that client.

Client modifies offer letter verbiage, without running it past their legal counsel, to include “performance goals” “to be determined” at some vague future point in time.

Candidate and company in the heat of recruiting romance sign the deal and the candidate commences employment.

People get busy and performance goals never get determined.

Employee terminates from the company for any of several reasons, one of which may be that they “missed” the performance goals that were never really determined. Or they were frustrated that the performance goals were never determined. Or the goals were determined but never communicated to the employee. The list goes on.

Former employee files lawsuit against the company.

Company executives, Board members, consultants, and lawyers point fingers at each other as the legal costs mount.

Expert witness like me is retained (maybe by the plaintiff, maybe by the defendant) who reviews the relevant documentation, and lack thereof, and tries to figure out whether the shares are not vested or not not vested, sometimes accompanied by an eyeroll or shaking of the head.

And now my story is all told.

But, unlike the cases in which I have testified, this case focuses not on the technical details of the equity grant but rather on the covenant of good faith and fair dealing. There are several pithy summaries of the case by law firms like this and they are qualified to opine on this while I am not. But in lay terms, it sounds like you’re just not allowed to cheat someone out of pay for the work they did just to avoid the cost of paying them.

So, what if you did all the work for the performance goal and maybe the goal is achieved but then are not there when the goal is officially acknowledged as being achieved? Maybe those shares are not not vested despite the plan document and grant language. In the Court’s words:

“…while [the executive]’s actual realization of any value of the shares promised him in [his employment agreement], could only take place in the future, those shares served as a ‘continuing inducement’ for work towards” the performance measures “and they functioned as a part of [his] ‘day-to-day compensation’ for work performed.”

Whoa, a long-term incentive award is considered day-to-day compensation? That upsets the apple cart a bit.

The lesson to be learned is that performance equity grants, regardless of the offer letter, plan document, and grant agreement – and those pesky emails that always turn up in subsequent litigation – exist in the context of much broader legal considerations and the language in the documents may only fuel a fire that erupts later when recruiting romance turns into a nasty employment divorce.

We’ll be tracking the path of this lawsuit and provide updates, maybe with more middle school math analogies and Dr. Seuss references. Or not.